Corporate Social Responsibility and Profitability: A Case Study on Dutch Bangla Bank Ltd.

Suraiya Mahbuba
Lecturer, Stamford University Bangladesh
Email: s.mahbuba@gmail.com

Nusrat Farzana
Lecturer, Stamford University Bangladesh
Email: nusrat_du@hotmail.com

ABSTRACT

In Bangladesh, the banking sector has a glorious history of getting engaged themselves in different kinds of social
activities which is formally known as CSR (Corporate Social Responsibilities). The paper examines the relationship
between CSR and profitability of Dutch Bangla Bank Ltd (DBBL) which is the initiator of CSR activities in the
banking sector of Bangladesh. The study used annual reports of DBBL for the year 2002 to 2011. Ordinary least
square (OLS) model of regression was analyzed using SPSS 16. to assess the impact as well as test the hypothesis
of the study whether there is a relationship and the extent of the relationship between the independent variable
(corporate social responsibility expenditure) and the dependent variable (profit after tax). Above all, the analysis
revealed that 90.7% of the variance of profit after tax of DBBL has been explained by the benefit accrued from
corporate social responsibility. The hypothesis that was formulated was tested and the result shows that there is
significant positive relationship between corporate social responsibility and profitability in case of DBBL.

Keyword: Corporate social responsibility, corporate financial performance, DBBL, profitability

1. Introduction

In developed economics the concept of business has changed from profit making activities to social welfare
activities where businesses are not only responsible to it’s shareholders but also to all of its stakeholders (Islam
2012). CSR (Corporate Social Responsibilities) is relatively a new concept in Bangladesh and all the institutions try
to maintain this responsibility along with other responsibilities.

In Bangladesh, the banking sector has a glorious history of getting engaged themselves in different kinds of social
activities which is formally known as CSR like donations to different organizations, country beautification,
patronizing cultural activities etc. But in some recent years there is tremendous growth in this involvement,
because in 2008 Bangladesh Bank Guideline suggested the Banks to involve in these activities in a more
structured way. This paper in basically focused on the CSR activities of the bank and how it is related with
profitability and in what extent Banks are eager to involve in these sort of CSR activities. Banks are profit based
organizations, so in this perspective they surely want to spend money in those sectors which will directly or
indirectly bring money for them, so obviously there are some positive relationships between CSR and banks
profitability. To analyze how much impact CSR create on profitability DBBL (Dutch Bangla Bank Limited) has been
choose. Dutch-Bangla Bank had adopted the policy of contributing to the social cause since its inception in 1996.
During the last 15 years it has been continuing its effort as a pioneer in the banking sector and has become the
leader much ahead of the other banks. The bank also wants to eliminate the impropriety in the society, to create
fellow feeling among the citizens of the country, motivate people to do good works and conserve nature. Thus
education, health care, human resource development, conservation of nature, creation of social awareness,
rehabilitation of destitute people, communication and address human sufferings arising out of manmade and
natural causes are some of the important areas where the Bank has been carrying out its social and philanthropic
activities.

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2. Literature Review

CSR is one of corporation’s responsibilities to its stakeholder and also a voluntary contribution by corporation to
sustainable development (Crane and Matten, 2007). In the period of increasing corporate financial scandals CSR
has become an important strategy for companies worldwide to improve their image as these activities can
potentially create a brand image for companies and develop positive relations with stakeholders (Yoon et al.,
2006).Corporate social responsibility may be referred to as "corporate citizenship" and can involve incurring
short-term costs that do not provide an immediate financial benefit to the company, but instead promote
positive social and environmental change. The term generally applies to company efforts that go beyond what
may be required by regulators or environmental protection groups. The recent globalization demand companies
to be more engaged in CSR activities (Chapple and Moon, 2005). The concept of corporate social responsibility
has been gaining importance in the past two decades. Recent studies suggest that corporate social responsibility
is an instrument to increase firms’ legitimacy in the eyes of their stakeholders and to develop positive social
responsibility images to burnish their reputations (Maigan and Ralson, 2002). “CSR goes beyond philanthropy and
is a comprehensive strategy to link core business strategy to issues of environment, human rights and labor
welfare, good governance and sustainable social investment measures”, said Shahamin S. Zaman, CEO, CSR
Centre in Bangladesh at the launch.

Identifying the relationship between corporate social responsibility and corporate financial performance
(Campbell, 2007) is the main attempt of the academicians. The relationship between corporate social
performance (CSP) and CFP has been a topic of hot debate of scholars for a half century (Dodd, 1932; Jarrell and
Peltzman, 1985; Hoffer et al., 1988; Preston and O’Bannon, 1997; Waddock and Graves, 1997; Griffin and Mahon,
1997; McWilliams and Siegel, 2000; and Simpson and Kohers, 2002).

The relationship between corporate social responsibilities and corporate financial performance has produced
mixed results with some studies concluding for a positive others negative and even others for the inexistence of
such a relationship (McWilliams Siegel 2001; Margoslis, Elfenbein and Walsh 2007; Tsoutsoura 2004).The
empirical studies conducted in developed markets on the relationship between CSR and CFP are essentially of
two distinct categories (Margolis and Walsh, 2003). The first category considers the short-run financial impact if
the company is involved in either socially or irresponsible actions. The results are mixed. For instance, Wright and
Ferris (1997) found negative relationships, while other researchers found positive relationships (Hall and Rieck,
1998; Posnikoff, 1997; Wright and Ferris, 1997 and Teoh et al., 1999) and no relationship was evidenced in the
study conducted by Teoh et al. (1999). The second category, examines the relationship of CSR and CFP in the
long-run, using accounting and market based measurements. The findings are also mixed. Various studies report
a negative relationship between CSR and CFP (Moore, 2001; Vance, 1975), while other studies reveal a neutral or
no relationship (Mahoney and Roberts, 2007; McWilliams and Seigel, 2000; Patten, 1990; Alexander and
Buchholz, 1978). Most of the prior studies found a positive relationship between CSR and CFP ( Simpson and
Kohers, 2002; Roman et al., 1999; Graves and Waddock, 1994; Roberts, 1992; McGuire et al., 1988; Again,
stakeholder theory suggests that Corporate Social Performance (CSP) is positively associated with CFP (Freeman
1984; Donaldson and Preston 1995). Moskowitz (1972) found a positive relationship between socially responsible
business practices and corporate equity returns. The study of Muhammad, Saleh and Zulkifli reveal that CSR and
all its dimensions are positively related to CFP.

3. Methodology and Model Development

3.1 Methodology
Secondary data was the chief source of information for the study. The study used annual reports of Dutch Bangla
Bank Ltd. Data used include corporate social responsibility expenditure and profit after tax for the period of
2002-2011. An extensive literature viewed to grasp the concept of CSR and the relationship between CSR and the
performance of banking business. Data relating to cost/investment/expenditure for the bank on corporate social
responsibility and profitability was used to construct ordinary least square (OLS) model of regression to which
was analyzed using SPSS 16. to assess the impact as well as test the hypothesis of the study; if there is
relationship and the extent of the relationship if any between the independent variable (corporate social
responsibility expenditure) and the dependent variable (profit after Tax).

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For this purpose the following hypotheses are tested to measure the relationship between CSR initiatives
represented by CSR expenditure (CSR) and the profitability of Dutch Bangla Bank Ltd. (DBBL).

H 0 : there is no significant relationship between Corporate Social Responsibility expenditure and Bank Profitability
H 1 : there is significant relationship between Corporate Social Responsibility expenditure Bank
Profitability

3.2 Model development:

Regression model was used to examine the relationship between the independent variable CSR and the
dependent variable PAT which is shown in equation (1):
P t = α 0 + β 1 CSR t + ἐ (1)
When P (banks Profitability) is the dependent variable and CSR is independent variable. Where; t is the t-th year
(time series annual data), Pt is the CSR of t-th year.

This study also attempted to use the Pearson correlation analysis method, this is consistently in line with
previous studies (Heinze, 1976; McGuire et al., 1988; Stanwick, 1998; Preston and O’Bannon, 1997; Charles-
Henri et al., 2002; Hull et al., 2008) and regression analysis (Fogler Nutt, 1975; Vance, 1975; Stanwick, 1998;
McWilliams et al., 2000; Hull et al., 2008) to understand the CSR and Profitability link and its relational degree
and direction.

4. Data Presentation, analysis and discussion

Table 1: DBBL data on CSR Expenditure and Profit after Tax

Year CSR Expenditure Profit After Tax

2002 7,789,473 177,600,000
2003 10,055,000 210,160,000
2004 26,945,450 236,350,000
2005 36,200,880 367,820,000
2006 38,789,049 362,180,000
2007 39,206,500 479,810,000
2008 171,016,500 821,670,000
2009 159,206,500 1,137,698,057
2010 168,860,000 2,002,315,963
2011 339,447,674 2,154,888,510
Source: Annual Report (2002-2011)

In order to reduce magnitude of the data for easy elasticity, the data presented in the table 1, the data was
logged for easy interpretation of the data. The logarithm of the magnitude of the data is presented in the table 2.

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Table 2: DBBL LOG data

Year CSR Expenditure Profit After Tax Log CSR Log PAT
2002 7,789,473 177,600,000 15.8682830 18.9950444
2003 10,055,000 210,160,000 16.12358 19.1633797
2004 26,945,450 236,350,000 17.1093224 19.2808243
2005 36,200,880 367,820,000 17.4045930 19.7231043
2006 38,789,049 362,180,000 17.4736485 19.7076519
2007 39,206,500 479,810,000 17.4843531 19.9889008
2008 171,016,500 821,670,000 18.9572706 20.5268494
2009 159,206,500 1,137,698,057 18.8857127 20.8522728
2010 168,860,000 2,002,315,963 18.9445805 21.4175703
2011 339,447,674 2,154,888,510 19.6428304 21.4910048
Source: Annual Report (2002-2011)
Using SPSS 16 to run the table 2, the logarithm data on CSR expenditure and Profit after Tax (PAT) of DBBL for the
period of 2002-2011. The output is presented in table 2. From the output the result shows high association or
relationship between the two variables under examination.

Table 3 Correlations between CSR and profit after Tax

CSR PAT
CSR Pearson Correlation 1 .953**

Sig. (1-tailed) .000

N 10 10
PAT Pearson Correlation .953 **
1
Sig. (1-tailed) .000
N 10 10
**. Correlation is significant at the 0.01 level (1-tailed).

Table 4: Regression result on the impact of corporate social responsibility on profitability model
Change Statistics
R Adjusted R Std. Error of the R Square F Sig. F Durbin-
Model R Square Square Estimate Change Change df1 df2 Change Watson
1 .953a .907 .896 .2943792 .907 78.482 1 8 .000 1.791
a. Predictors: (Constant), CSR
b. Dependent Variable: PAT

This establishes relationship between CSR expenditure and PAT was found to be significant at 0.01 or 1%. To
evaluate the impact of corporate social responsibility expenditure on profitability in Bangladeshi banks revealed
(Beta= 0.953, p<.01), the results of the Ordinary Least Square regression analysis is shown in table 4. This means
that for every unit change increment the CSR expenditure will lead to .953 or 95.3% increase in the profit after
tax of the company. It also shows that R-square was 0.907 which accounted for about 90.7% of the variation in
the profit after tax of DBBL. It is also indicating that corporate social responsibility is important in achieving
effective financial performance of banks in Bangladesh. The overall significance of the model is showed in the
table (F-statistic= 78.48%, p<.01) and the Durbin-Watson show that the model is fit at 1.79. Over all, the model

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states that 90.7% of the variance of profit after tax of DBBL has been explained by the benefit accrued from
corporate social responsibility.

From the above table 4, the value of (“r”= 0.953, p < .01) which stand for “r” calculated. This shows that there is a
positive correlation between corporate social responsibility expenditure and the profit earned by the company
which is significant at the 0.01 level (1-tailed). This means that the null hypothesis is rejected and leading to the
acceptance of the alternative hypothesis.
Table 5: Regression Co-efficient

Un standardized Coefficients Standardized Coefficients 95% Confidence Interval for B

Model B Std. Error Beta t Sig. Lower Bound Upper Bound
1 (Constant) 7.975 1.373 5.806 .000 4.808 11.142

CSR .682 .077 .953 8.859 .000 .505 .860

Dependent Variable: PAT

Above are the (un standardized) and standardized regression weights for the regression analysis of corporate
social responsibilities and profitability. The standardized regression coefficient (beta weight) for CSR is .953.
What this weight means is that for every unit change in CSR, profitability will increase by a multiple of .953
standard deviations. Note that the beta coefficients are significant at p < .001.

The columns headed “95% confidence intervals” shows confidence intervals around the un standardized
regression coefficients. Thus it can be said that, with 95% confidence the value of the constant lies somewhere
between 4.808 and 11.142, and the value of the regression coefficient b (un standardized) lies somewhere
between .505 and .860)

4.2 Discussion of Findings

The results of the ordinary least square regression analysis as showed the impact of corporate social
responsibility expenditure on profitability in DBBL which revealed (Beta= 0.953, p<.01). This means that for every
unit change increment the CSR expenditure will lead to .953 or 95.3% increase in the profit after tax of the
company. The R-square was 0.907 which accounted for about 90.7% of the variation in the profit after tax of
DBBL. It is also indicating that corporate social responsibility is important in achieving effective financial
performance of corporate organization in Bangladesh. The overall significance of the model is showed in the
table (F-statistic= 78.48, p<.01) and the Durbin-Watson show that the model is fit at 1.79. Above all, the model
revealed that 90.7% of the variance of profit after tax of DBBL has been explained by the benefit accrued from
corporate social responsibility. The hypothesis that was formulated was tested and the result shows that there is
significant relationship between corporate social responsibility and profitability

5. Conclusion

From the above analysis it is clear that CSR has significant impact on the profitability of DBBL. So the CSR
expenditure provides good returns for the banks in the short run and in the long run it will provide better return
surely. The study concludes that there is a significant relationship between CSR and profitability and the null
hypothesis is rejected. It should be pointed out that this study has several limitations. First, the study is based
only on the net profit after tax of the bank which is one of the major indicators of bank’s financial performance
but not the only one. Second, the study considers only one bank of Bangladesh which does not reflect the overall
banking sectors of Bangladesh.

In Bangladesh, CSR initiatives by banks have risen significantly. So Bangladesh Bank should carefully monitor the
activities of the Banks whether they are complying the mandatory involvement in the CSR activities from net
profit which is now 10% or more from its previous year’s net profit. Above all, new laws regarding CSR, legal

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restrictions, to do CSR activities for the betterment of the people not for profit making or marketing strategies
will surely bring more sustainable growth in the banking sectors of Bangladesh.

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